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🎧 How to Reduce The Risk Of Unauthorized Subcontracting? 🎧
00:00 – Greetings, catching up with Renaud, and some discussion about his India trip and the various content we created about it (check the links below).
04:13 – Introducing the topic: Unauthorized subcontracting.
05:04 – What is subcontracting/unauthorized subcontracting?
No factory makes everything. Raw materials and components often need to come from outside, specialists will be used to weather jeans, make the display of a mobile phone, plastic parts, etc. For example, you specify to use a battery from Panasonic in your device, so Panasonic is the subcontractor for your battery who your supplier will deal with; you know about this, and it’s in your Bill of Materials. This type of subcontracting is normal and expected by buyers.
But, if the critical manufacturing steps like assembly or cut & sew which are supposed to be done by the factory the buyer has agreed to work with are given to a different factory without the buyer’s knowledge, this is unauthorized subcontracting.
07:45 – Why this happens in China quite a lot and how it affects social audits.
Unauthorized subcontracting happens globally, but it’s fairly common in China because, as we’ve spoken about before, Chinese suppliers often don’t like to give customers any supply chain information. They see who they work with as a trade secret. They often see nothing wrong with subcontracting without informing the buyer.
It’s also very bad for businesses who conduct social audits – as these audits only work if they’re done on the factory that is actually doing the work. If an unknown factory does the work, the audit’s results are false.
What problems does unauthorized subcontracting cause?
12:41 – Non-compliance.
When a manufacturing facility for a product has been certified as compliant with UL, CE, etc, if another is used, of course, it’s non-compliant as we cannot guarantee they use the same processes, materials, etc.
13:41 – Poor quality.
A qualified manufacturing facility can get too busy to handle the order quantity, so they subcontract to another supplier who isn’t qualified rather than telling the buyer they can’t make it on time. Oftentimes the subcontractor is a lower-quality factory because the best ones are busy, just like your qualified supplier. They also don’t work to your quality standard and may not have good staff or quality control – this results in poor quality products.
17:51 – IP at risk.
A factory that is working as a subcontractor who you don’t even know about but is assembling your product has access to your product design and components. Who is to say that they won’t produce more of your products and sell to competitors or in direct competition with you later on? You don’t know them or have any protection from legal agreements.
19:26 – Products made in banned areas or staff where slave labor is a concern.
Countries like the USA ban products made in certain provinces of China completely. If your qualified supplier isn’t there, that’s good, but what if the unauthorized subcontracting takes place there without your knowledge, but it’s later found to have occurred by the authorities? You will be held responsible.
How to reduce the risks of unauthorized subcontracting happening?
23:16 – 1. Factory data collection.
Understand who you’re working with and when they are more or less busy during the year. They may be more tempted to subcontract work during their busy periods and also if they do not truly have the capacity to fulfill your orders (even if they claim they do). Auditing suppliers before working with them is a good way to gain this information and understand what is realistic and possible.
26:45 – 2. Plan to improve capacity and reduce delays.
Put in place material and production control if needed. The absence of a proper production planning system means that their forecasts about when they can complete production by are inaccurate and, if delays occur and they’re under time pressure, increases the likelihood of them subcontracting in order to hit deadlines, they will also be unable to give you good updates on production if you request information. Bringing a production engineer into the supplier for a couple of days to consult can help increase their output by a large percentage.
32:40 – 3. Sign a manufacturing agreement with the supplier.
Sign an enforceable manufacturing agreement with your supplier that includes a clause forbidding unauthorized subcontracting.
34:09 – 4. Give the supplier a pre-order confirmation.
Giving the supplier a pre-order confirmation as early as possible gives them time to organize production and prepare for the volume required, reducing the chances of subcontracting. If they do need to subcontract, maybe there’s time for you to qualify the subcontractor they suggest. Buyers often just drop the order on a supplier with little notice, but an advanced warning gives everyone more options and security.
35:57 – 5. Follow up on production.
What’s the plan, major milestones, and rough dates they’ll be achieved? After obtaining this information from the supplier, send staff or use a third-party company (such as from Sofeast) to check that they’re hitting these production goals.
36:38 – 6. Utilize unannounced audits.
Unannounced audits can be effective for keeping suppliers on their toes, but it’s required that you add permission to do this to the manufacturing agreement or they may be denied access. Where possible sending your own staff and an outside auditor will add authority to the visit.
41:14 – Extra: Travel to China in Summer 2022.
A rough update about quarantine time reduction for inbound travellers and how feasible it is for business travel to resume any time soon.
44:13 – Wrapping up.
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
- Read a whole series of blog posts about vetting Chinese suppliers to help you find a lower-risk supplier
- Renaud was interviewed about social audits in this news article – unauthorized subcontracting has a serious effect on these [Free account to access]
- Get help from Sofeast to source great suppliers
- Audit your supplier’s processes with one of our process management audits in order to reduce the risks of them not coping and subcontracting
- Sofeast project managers check on and manage your supplier to assure that your production is on track
We are not lawyers. What we wrote above is based only on our understanding of legal requirements. QualityInspection.org does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so.
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